Claims by the UK energy regulatory body -- the Office of Gas and Electricity Markets (Ofgem) -- that the first year's operation of the country's new electricity trading arrangements (NETA) has been a success have been greeted with a hefty dose of scepticism by the renewables industry, members of parliament and consumer groups. Among those pouring scorn on several of Ofgem's "unsubstantiated" claims is the British Wind Energy Association (BWEA) and consumer watchdog Energywatch, while parliament's Environmental Audit Committee says, "NETA represents a major barrier to the deployment of renewables."
Yet according to Ofgem regulator Callum McCarthy, smaller generators -- including renewable energy producers -- are in a better position now than immediately after the "go-live" date for NETA (which replaced the UK power pool) in March 2001. How smaller generators have fared under NETA has been an issue of much debate during the year. "The review shows a more encouraging picture for these generators than after the first two months under NETA," according to McCarthy.
He admits, however, that Ofgem's "full and factual" review of NETA's first year bases these conclusions on just 76 responses from 171 small generators. The findings, he says, should be treated with caution. Nonetheless, Ofgem concludes that prices paid for wind during the year have averaged £41.30/MWh and ranged between £16/MWh to £77.50/MWh.
This is disputed by the BWEA's David Still. "I have not found a single wind generator who got as much as £77 per megawatt hour," he says. Moreover, the prices paid under Non Fossil Fuel Obligation (NFFO) power purchase contracts are totally irrelevant to Ofgem's review, since the generators receive the price they bid into NFFO regardless of the effects of NETA.
Still also points out that before NETA, non-NFFO generators were getting around £30/MWh compared to £10/MWh to £16/MWh immediately after the trading rules came into effect. "We have requested clarification of some points from the regulator," he says. BWEA has also made its views known to energy minister Brian Wilson.
NETA is designed to keep the electricity system in balance at all times. Generators or suppliers who trade under NETA have to submit final offers for the amount of electricity they will supply ahead of time; this has recently been changed to one hour before "gate closure," down from the 3.5 hours notice that was initially demanded in the first year of NETA. If their actual output does not match their offer, they are deemed "out of balance" and are charged or paid for the difference.
This system favours large generators or suppliers who can iron out most of the imbalances within a large diverse portfolio of generation. Smaller players are hit disproportionately hard, but matters are even worse for an intermittent source of energy such as wind which is more likely than most other forms of generation to incur imbalance charges. This was particularly evident during the first months of the new arrangements when a high spread between imbalance prices as the system bedded down meant that any generators out of balance incurred large penalties. Ofgem reports that this volatility in the balancing arrangements has reduced dramatically; the spread of imbalance prices is down from £70/MWh just after the introduction of NETA, to £17/MWh today.
The regulator's key measure of success for NETA -- as always -- is how far it has pushed down electricity prices. According to McCarthy, a survey of smaller generators shows that the prices paid for their output have not fallen as much as they have for larger generators. Over the year, the average price was £20.6/MWh compared with £23.2/MWh in the first two months of NETA -- a reduction of 11%. This compares with a 20% reduction for baseload wholesale electricity. Overall, prices for smaller generators are either in line with those of other generators, or are much higher where they attract government subsidy, such as wind power, says Ofgem.
Not only does BWEA criticise the regulator's failure to substantiate such claims, so does Energywatch. The consumer group's Anne Robinson calls on the regulator "to provide hard numbers rather than suggestions without analysis." While Robinson accuses Ofgem of ignoring the interests of domestic consumers, BWEA is more concerned that it ignores environmental considerations in the quest to drive down prices.
Indeed, one of the more environmentally damaging effects of NETA is that fossil fuel generators are so keen to avoid paying high imbalance penalties for not delivering on their predicted output, that they choose to run their plants on part-load, ready to increase output to cover any shortages, but thereby adding to polluting emissions.
This particular NETA weakness is highlighted by the parliamentary Environmental Audit Committee in a report, published in July, on renewables and the government's Energy Review, which was conducted last year by the prime minister's Performance and Innovation Unit. The committee points out that unnecessary part loading of power stations has been calculated to increase emissions by 0.8 million tonnes of carbon a year.
It also condemns Ofgem's failure to carry out an environmental appraisal of its proposals for NETA before introducing the new trading market. This is a result of the government's failure to make the promotion of sustainable development one of Ofgem's key objectives, say the members of parliament, who are calling for an urgent examination of the environmental impact of NETA.
pressing for change
Still makes the same point. "Ofgem's priorities are totally to do with their statutory duties, and nothing with other matters such as protecting the environment," he says. "So we are going to press the government for a change in their statutory duties to include the environment as part of their remit." As it is today, Ofgem is not obliged to follow government policy on energy and the environment.
Indeed, the audit committee points out that the pressure applied by Ofgem to reduce prices sends conflicting signals to the public. Energy prices must rise significantly in the medium and longer term if the UK is to move to a more environmentally benign energy system. "It is practically inconceivable that such a transition could be achieved on the basis of cheap energy," it says.
Meanwhile, an independent panel has been formed to advise Ofgem on the environmental aspects of its work. The 14 "experts" from government, industry and environmental groups include the BWEA's Nick Goodall. The Environmental Advisory Group is to be chaired by Callum McCarthy and will hold its inaugural meeting on November 22.